After the gold price developed extremely strongly last year, the start into 2020 was also positive for gold investors. But now there are growing concerns that the gold market could face a similar fate as it did around 40 years ago.
• Bull run at gold continued in 2020
• Concerning parallels to 1980
• Is the crash imminent?
Gold ended 2019 with a very strong performance. The continuing smoldering trade conflict between the two largest economies in the world, concerns about the approaching end of the bull market, the economic slowdown and other factors drove investors into the supposedly safe haven, making gold the best year since 2010.
The shiny precious metal has also developed positively in the new year. Although it has come back a bit from its temporarily high of $ 1,611, there is still an increase of over 4 percent on the table.
In the face of this bull run, investors are increasingly feeling back in 1980, which worries them.
Precious metal frenzy and gold depression
There are always phases in which the gold price continues to rise enormously. This was also the case around 40 years ago. While the ounce price was around $ 300 in the summer of 1979, it had doubled by early 1980, climbing to a whopping $ 600. In the further course, the Iran crisis caused great uncertainty among investors and even drove the price for the shiny precious metal to a century high. On January 21, 1980, gold climbed the highest price of $ 850 at the time. The people fell into a veritable euphoria, the precious metal rush broadened the path. “Rich speculators bought tons, small savers run from bank to bank to buy coins and bars. The gold fever has grabbed the people,” quotes Die Welt the news of a big German news magazine at that time.
But, as is so often the case, after the euphoria came disillusionment. After such phases, the price of gold has generally been down for a long time. There was a gold depression. As early as March 1980, the price of an ounce of the precious metal had dropped below $ 500. It wasn’t until 2007, 27 years later, that the decades-long gold bear market ended. The gold price was back at $ 800.
Terrifying parallels to 1980?
More and more investors are now wondering whether we will soon experience a similar crash. “The valuation of gold is indeed a particularly difficult one,” quotes Die Welt Thorsten Polleit, chief economist at Degussa Goldhandel.
Although the gold price is currently hardly holding, there are some differences in addition to the frightening parallels. As Die Welt explains, American government bond holders were unable to do so due to the restrictive nature of the time monetary policy achieve a return around 40 years ago that was significantly above the inflation rate. The interest rate continued to rise, while the price increase declined. The real return in 1980 was more than 9 percent. This is not to be compared with the current situation, in which long-term government bonds generate a nominal 1.8 percent interest rate, while inflation is above 2 percent, the newspaper continues.
You can also see from the Dow Jones Gold Ratio that there are not only parallels to the past. The ratio describes the quotient of the Dow Jones level and the gold price and shows how stocks and precious metals relate to each other. While stocks were extremely cheap in relation to gold in 1980, the ratio today is a little under 20. Gold is therefore neither extremely expensive nor extremely cheap – the same applies to stocks. If the current situation developed similarly to that in 1980, gold prices of over $ 10,000 would be conceivable. However, no expert currently has such a high price target. Even the most optimistic analysts see the ounce price as low as $ 1,800 in the near future.
Shining years for gold
Nevertheless, the precious metal should continue to develop positively, numerous experts believe. They do not see an approaching bear market as it did about 40 years ago. “The 2020s will be brilliant, at least for gold owners,” says Lars-Henning Müller, Head of Funds & Mandates at Merck Finck Privatbankiers. Interest rates are likely to remain low, Müller believes in view of the high global debt and the weakening economic strength. Added to this is the high need for security among investors, as Springer Professional cited the expert’s reasons.
“On balance, the precious metal is more at the beginning of a new upward momentum than at the end,” believes Jörg Scherer from HSBC. He sees the gold price at around $ 1,670 towards the end of the year. In the long term, an attack on the all-time high of 1,920 US dollars that the shiny precious metal had climbed in September 2011 is also quite possible.
Editorial office finanzen.ch
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